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A degree too expensive

Innovative funding models could be the answer to escalating tuition fees

by Wilfried Vanhonacker

As the new batch of students begin classes at Lebanon’s universities and families prepare to pay painfully high — and seemingly rising — tuition fees, it is time for a provocative question: does higher education have to cost so much?

Before coming to the American University of Beirut, I spent a few years in Moscow building the foundation of a new business school, the Moscow School of Management (MSM).  It was founded by a group of private entrepreneurs who felt that existing business schools no longer catered to the market needs, especially not the ones they had experienced in the tumultuous aftermath of the collapse of the former Soviet Union. With the emergence of new and transition economies in Russia and countries such as China, India, and Brazil (the “BRICs”), the need was growing for entrepreneurial talent that could lead in difficult, uncertain and unstructured environments. A key focus of MSM was to nurture such talent and at the same time generate top-dollar revenue that could finance the school.

Entrepreneurial talent typically has lots of energy and ideas but no patience and money. Hence, the pedagogy and the revenue model had to be custom-designed. Pedagogy had to be hands-on, experiential, accelerated, and individual-focused. Tuition-based education was not an option since the students had no money to pay. For the revenue model, our approach combined success fees from project-based learning and part of the management fee of a commercial venture capital (VC) fund set up to invest in successful start-ups.

Compared to typical VC funds, we charged a higher management fee but kept a lower carry; hence, the higher management fee enabled us to finance the startup academy, and investors had a larger than normal carry in projects. Hence, through this novel fundraising mechanism, we got short-term operating cash and investors had a potential higher long-term payout; more importantly, the budding entrepreneurs received a relevant but cheap education. The solution proved a win-win for all and made a compelling case that models other than those that are tuition-based are possible to alleviate the rising costs of higher education.

With college tuition across the world reaching new heights, a college education is becoming a luxury few can afford. More worrisome is that it is a luxury whose value is increasingly being questioned as well. The data does not lie: across the world, employment rates of college grads have been dropping. More surprisingly, the rates are worst in emerging markets.
In China, the graduating class in 2013 is 7 million; if recent placement statistics do not improve, over 60 percent will not find employment where graduates use what they studied and get paid a salary that would pay back their education in their lifetime. College education is no longer a sure ticket to employability and a rewarding career. And that puts the increased tuition costs in a rather precarious light.

While it is not the time to keep kids out of college, changes are needed and universities have to reinvent themselves in more ways than one. This could be a tall order for the many academic institutions that have barricaded themselves in ivory towers. But it is exactly this insularity that educational institutions have to overcome if they want to succeed in a global environment where companies and other organizations have built networks by allowing their boundaries to blur.

Rising to the challenge

Why are tuition fees so high and rising? The answer is simple: universities are expensive to run. No doubt, significant savings can come from more efficient operations but research infrastructure, faculty, pedagogical technology and other ingredients core to an academic institution are expensive to acquire and maintain.

Some universities are subsidized by governments but the latter are all under pressure to rein in bloating budget deficits. The University of California (UC) system, which contains some of the best academic institutions in the world, has faced severe state-spending cuts for years, and just recently the Anderson School of Business at UCLA opted to privatize its popular MBA program in order to secure its survival. Although governments do play a role in basic education and research,   relying heavily on government funds is not sustainable.

University endowments give a buffer but there are limits to fundraising especially in times of economic uncertainty. Education has an edge in philanthropy but where overall giving has increased, the number of capital campaigns universities are running has grown exponentially. No university should feel safe banking on endowment increases on one side and tuition increases on the other. Different business models are needed.

In fact, it is not that difficult to think of alternative models to make education free. Wouldn’t it be wonderful to have a global MBA that is free? As an education provider, you could be highly selective in who you enroll and as such create a truly optimal social learning environment. For business schools, and professional schools in general, this is relatively easier and more so if they are truly and actively plugged into the business community whereby alternative revenue-generating models could drive business education costs down, conceivably to zero.

At MSM, I created an MBA program almost entirely based on project-based learning. Students spent only four months in Moscow taking classes, and the rest of the program was built around five projects that were executed on three different continents.  And these were real projects for real clients. The projects have to be meaningful to keep student teams motivated and achieve learning; and the projects have to be relevant for the clients to maintain their active involvement.

The clients paid for all expenses plus a success fee. The selling proposition was simple: McKinsey quality at a fraction of the cost! Who would not go for that and in the process get a real preview on the available young talent out there? It is not much of a stretch to think of expanding the project-based learning model to the point where the clients’ fees pay for the entire education of the students.

Rebuilding bridges

And more complex partnerships beyond the private sector are possible to finance education (and make it more market-credible in the process). One could explore education financed through social impact (or innovation) bonds in a public-private arrangement. This financial innovation has become popular in the United States in recent years for financing private educational projects with clear social targets that imply significant government-budget savings such as lowering unemployment benefits, healthcare costs, etcetera. 

How about tackling the challenge of employability of college graduates via bridge programs executed through partnerships with industries that have significant entry-level talent needs? The companies involved could partly subsidize the program (with the rest of the cost covered through social impact bonds) not to mention provide much needed industry-specific content. This leaves students, companies and even governments better off — a ‘win-win-win’ one might say. It is very possible, but conceptualizing new business models for education requires a fundamental rethinking of what the role of education is and how to best execute it at an affordable — or free — level. Is the role of education simply to certify academic competence? Or is it professional competence? Is it enough that students know what to do or should they also know how to get it done?

All these ideas are quite disruptive to academic institutions steeped in tradition. They scare traditional faculty and university administrators alike. It requires them to change. That will only happen with visionary leadership and change management competence. Ironically, the very institutions that study, research and teach the gospel on these very concepts are the ones that often lack these crucial competencies. Change is a serious threat to their survival. But remaining attached to traditional methods will not be sustainable either.


Wilfried Vanhonacker is a professor and the Coca Cola chair in marketing, The Olayan School of Business, American University of Beirut

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